This decision of the Victorian Court of Appeal examines the question whether a fund established to meet the liabilities of an insurer which is in liquidation has rights of contribution against another insurer liable in relation to the same loss.

As the result of an incident which occurred at the Australian Grand Prix in Melbourne in March 1998 when a valuable video screen was damaged as the result of the failure of scaffolding, proceedings were brought against the scaffolder, Ronald Steele, which resulted in a judgment against him.

Mr Steele held a liability policy with HIH. The Australian Grand Prix Corporation held insurance with the respondent, which also responded to the loss and which provided protection to Mr Steele as a contractor to the Corporation.

The HIH Claim Support Scheme was established by the federal government to provide assistance to policy holders of HIH Casualty & General Insurance Limited and associated companies consequent upon their liquidation. Mr Steele had made a claim on HIH prior to its liquidation. He sought assistance from the scheme and as a term of the provision of assistance was obliged to assign his rights against HIH to the appellant as trustee of the scheme.

A payment having been made by the appellant to Mr Steele, the appellant brought proceedings against the respondent insurer for contribution. At first instance, before Hollingworth J ([2009] VSC 434), it was held that there was no entitlement to contribution as the liabilities of the appellant and the respondent were not coordinate. The Court of Appeal succinctly summarised her Honour’s reasons for that conclusion as follows:

“The trial judge dismissed the appellant’s claim on two bases. First, her Honour determined that the appellant and the respondent did not have a common obligation at the time of the insuring clause event (March 1998). Her Honour so held because: first, the appellant did not exist until 2001; and secondly, the contract between the appellant and Steele only came into existence when the appellant made the first payment under the support scheme (again, well after March 1998).

“Secondly, her Honour concluded that even if she was wrong on the first point, the appellant’s indemnity obligation was a primary one – whereas the respondent’s indemnity obligation was secondary. That finding having been made, the liabilities of the appellant and the respondent could not be coordinate.” [14] and [15]

Before the Court of Appeal there was a dispute as to the proper categorisation of the liabilities. The respondent argued that its liability was properly to be characterised as secondary and the appellant’s liability as primary, so that contribution was not available. It referred to Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd [2000] WASCA 408; (2000) 23 WAR 291 and Caledonia North Sea Limited v British Telecommunications PLC [2002] Lloyd’s Rep 553. The appellant argued “first, that there was no basis for holding the appellant’s liability to be primary; and secondly, even if the appellant’s liability was primary, the authorities did not mandate a conclusion in every case that there could be no contribution between parties liable for a loss where the liabilities were of different degree. Each case, it was submitted, depended on a proper understanding of the underlying facts”. [18]

It was held by the Court of Appeal that it was not necessary to resolve this question. In the Court’s view there were two fundamental reasons why contribution was not available:

“First, the liabilities are different because the respondent’s liability was to indemnify Steele in respect of his liability for the loss that occurred as a result of the screen being damaged in March 1998. Whilst this was the same loss covered by the HIH policy, the liability of the appellant created by the acceptance of the offer document was subject to a condition enabling the appellant to prove in the winding up of HIH. According to the offer document, the payout to unsecured creditors was ‘likely to be less than 50 cents in the dollar and that the first payment will not be made until at least March 2003’”. [20]

In relation to this, it had been submitted for the appellant that an order for contribution should be made, subject to half of any dividend paid to the appellant on the winding up of HIH being paid to the respondent. However, in the Court’s view, “this concession merely recognises that the liabilities of the appellant and the respondent were not coordinate”. [21]

The Court continued:

“Secondly, as was submitted by the appellant, underlying the doctrine of contribution are notions of fairness, equity, the prevention of unjust enrichment and natural justice. As has been said, the doctrine has an equal foundation in morals ‘since no-one ought to profit by another man’s loss where he himself has incurred a like responsibility’.

“Further, an underlying assumption of the doctrine of contribution is that the creditor has equal or substantially equal recourse to each party who is liable. That is not the case here. In the present case, if Steele had been paid under the SGIC/IAL policy, there would have been no occasion for him to make a claim on the scheme – and thus no contract would have come into existence between Steele and the appellant, and the appellant would never have had any liability to Steele. Even if Steele had completed the offer document, no contract could have come into existence because the appellant would never have made a payment – payment already having been made by the respondent. So if, instead of the appellant paying Steele’s claim, the respondent had paid Steele’s claim, there would have been no entitlement in the respondent to claim contribution from the appellant. For this reason also, the liabilities of the appellant and the respondent are not coordinate”. [22]-[23].

The appeal was dismissed.

Reproduced with the permission of the Australian Insurance Law Bulletin.

PROFESSOR GREG REINHARDT is executive director of the Australasian Institute of Judicial Administration and a member of the Faculty of Law at Monash University, ph 9600 1311, email Gregory.Reinhardt@law.monash.edu.au.

The numbers in square brackets in the text refer to the paragraph numbers in the judgment. The full version of this judgment can be found at www.austlii.edu.au/databases.html.